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Saturday, 29 July 2017

Would Grab command billions if it goes public?

AFTER the latest round of fund-raising, Grab, the company that has taken the hired-car service industry in the region by storm, commands a valuation of US$6bil or RM25.6bil.

That is even higher than the market capitalisation of Telekom Malaysia Bhd (TM) and Kuala Lumpur Kepong Bhd (KLK). TM is in the telecommunications business and the dominant provider of fixed broadband service, while KLK is easily among the more established plantation companies in the world.

Both TM and KLK are old companies, but yet they remain relevant in today’s economy where digital play commands premium valuations. However, the value that these companies fetch are same as what private investors are prepared to pay for a slice of Grab.

The four–year-old Grab, which is an app-based transportation company, is competing with Uber for the hired-car market segment in the region.

Grab is reported to have a share of more than 70% of the market. In the latest round of fund raising, it has already secured US$2bil of the US$2.5bil that it sought.

Grab’s primary backers, Didi Chuxing and SoftBank of Japan, are forking out the US$2bil, while the remaining amount is expected to come from investors. With the latest round of funding, Grab would have collected US$4bil from investors.

Only a select group of investors are willing to part with their money for companies such as Grab. These are investors who take the view that valuations of companies such as Grab would only grow in the future, and that their public listing eventually would be a giant initial offering.

They see the trend in the United States, where the top-five most valuable companies on the Nasdaq are all technology stocks.

Heading the list is Apple and the others in the same league are Microsoft, Alphabet –which is Google’s parent company – Amazon and Facebook.

Only Facebook has yet to break through the US$500bil market capitalisation level. Amazon, the champion online retailer that provides Internet trading of goods and delivers them to the doorstep of homes, broke through the US$500bil mark in terms of its value on Wednesday.

Grab, although only four years old, is already commanding a market value higher than TM and on par with KLK. If it were to be listed on Bursa Malaysia, it would be the 17th most valuable company in Malaysia.

If Grab decides to list a few years down the road, the view is that it will command valuations higher or closer to the likes of Sime Darby Bhd and CIMB Group Holdings Bhd that at the moment are already worth more than RM55bil.

However, would that really be the case? Would Grab eventually be able to garner ballistic valuations when it decides to list?

So far, Uber, which started seven years ago and is a bigger app-based transportation company compared to Grab, has not been listed yet.

Uber operates in 270 cities worldwide and as of June this year, was reported to have completed five billion trips.

Uber has been touted as the hottest listing for this year and is valued at more than US$60bil. But now, there is scepticism if the listing is going to happen anytime this year after the company faced setbacks in several countries outside the US and is bogged down by a crisis in its top management.

The co-founder of Uber, Travis Kalanick, has stepped down as he did not deal with various human resource issues ranging from the drivers being treated unfairly to sexual harassment.

Latest reports indicate that Uber is still operating at a loss amidst the stiff competition it faces.

It is facing stiff competition in India and even in its home base in the US from Lyft, which is another app-based transportation company. In China, where Uber was losing US$1bil a year, it has formed a joint venture with Didi Chuxing and the losses have reduced.

Some reports indicate that Uber lost US$3bil last year, which is no small amount for even the world’s most valuable start-up.

Companies go for listing because they need capital to expand. In the case of fast-growing technology companies such as Grab, apart from raising new money, a listing also allows early investors to exit.

And investors would always want high valuations for their company. But only companies with strong growth in earnings command high valuations.

The reality is that not all technology companies are able to register high growth in earnings consistently. And the companies flounder when the earnings do not live up to expectations.

Snap, the messaging app company, is an example of one that is paying the price for its less optimistic outlook by analysts.

The digital economy tends to depress prices. For example, a price of a gigabyte is only US$0.01 now compared to US$11 in 2000. The mantra of the digital economy is low prices and no barriers to entry.

In the case of the app-hailing transportation business, the key to growing market share is cheap fares.

Grab, Uber and the other players in this segment subsidise the normal taxi fares. This is the reason why Uber is still losing money.

Can the subsidy be removed so that the fares be higher?

Probably that is the objective, but it will take time. Or the cheap fare environment may continue for the longest time as more competitors come into the scene. Remember, they are operating in a segment where there are no barriers to entry in this disruptive digital economy.

Companies such as Grab are in a sexy industry where the growth potential is enormous.

Investors want to get a piece of the action with a view of it eventually being listed at a lofty valuation.

A listing is something that will happen someday. But the valuations that such companies would potentially command is another subject matter altogether.

Tags / Keywords: Analyst Reports , grab uber

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